This next part in The New England Journal of Medicine’s fundamentals of health policy series is written by my favorite health policy writing duo–Drs. Baicker and Chandra. They both do amazing research independently, but when they work together to write an article, it seems to be extra insightful and interesting.
Their task with this article is to help people think deeper than the simplistic sentiment, “The U.S. spends way more than every other country on healthcare; we need to cut back, and any increase in spending is wasteful!”
Key insight: Only looking at the aggregate number obscures many important facts about our healthcare spending; digging a little deeper totally changes the conversation.
Here are my favorite examples of this from their article:
As nations grow richer, they spend more on healthcare. So, based on that alone, the U.S. would be expected to spend more than nearly every other country. Of course, this doesn’t explain all the difference between our spending compared to other countries, but it explains a lot of it, and it’s not a bad thing. A related side point they make about this is that it “highlights the challenge of putting all Americans, with very disparate incomes, into a single insurance plan.”
Studies that conclude our higher spending is purely due to higher prices (rather than higher quantity) aren’t able to account for all the inter-country differences in quality or intensity of care. This one was news to me, and you’ll see in my prior writings that I didn’t know this. You see, I thought that if a study shows that we generally have the same number of hospitalizations, doctor visits, prescriptions, imaging studies, etc., they would have controlled for differences in what kind of doctor visits (primary care vs. specialist) and scans (a 0.5-Tesla MRI vs. a 3-Tesla MRI) and such were being delivered. But that’s wrong–researchers don’t always have the data they would need to be able to do that. This means we need to look closer at exactly what we’re getting when we are paying a higher price than other nations, which will help us distinguish if it’s just plain overpriced in the U.S. or if it’s a substantially better service.
If we look at specific health outcome domains, we find out that we overspend on some of them and actually underspend on others. This means that sometimes increasing spending is actually a good thing, like for vaccines or other preventive care. When we look at spending this way, we can start to evaluate whether reforms’ spending impacts are effective not based on whether they increase or decrease aggregate spending, but instead we can base our assessments on how well they do at reducing overspending on the low-value care and increasing spending on the high-value care.
I hope that helps you think a little differently about (i.e., be a little more critical of) aggregate health spending references like it did for me.
And, to close, here’s a thought-provoking statement they drop in the middle of their article: “The debate about whether health care is a right sidesteps the more difficult and important question of how much health care is a right that should be ensured through public programs.”
There was a recent 60 Minutes episode with a segment that talked about why healthcare prices are so high, and I learned a couple new things.
The segment focused on Sutter Health, which is a large healthcare system in Northern California. Sutter Health was the bad guy in this episode, but the American Hospital Association dutifully provided a counter-argument to the story here.
For context, remember that the price negotiations between hospitals and insurers are not based on costs but rather bargaining power. The more bargaining power the hospital has over the insurer, the higher the prices they win.
Here is Sutter Health’s strategy to win more bargaining power, according to the 60 Minutes segment:
First, buy up other hospitals to become a monopoly in as many markets as possible. If you cannot be a complete monopoly somewhere, find a way to become a monopoly over a key service line, such as maternity care. Next, require two things in every contract you make with an insurer–a gag clause (so nobody can divulge the prices agreed upon) and an all-or-nothing clause (so the insurer has to have all the system’s hospitals and services in network or none of them).
The combination of all that leads to the hospital having much greater bargaining power.
The insurers are kind of forced to have Sutter Health in their networks to avoid having important gaps in coverage (either a regional gap if the one hospital in that county isn’t in network, or a service-specific gap if Sutter Health is the only provider of that service in an area). They leverage that foot in the door with the all-or-nothing clause, so now basically every insurer is compelled to include every Sutter Health hospital, so Sutter Health can demand very high prices and get away with it. And, for Sutter Health’s protection against the bad PR they would get by charging such high prices, they have the gag clauses in place.
Pretty clever I’d say. Unfortunately for them, the government tends to notice when a hospital system becomes a monopoly in multiple ways, and they also notice when a hospital system is making a lot more money than others around it. So they get investigated, reporters dig up the juicy story, and the government slaps a few wrists with lawsuits and new regulations.
Is there a better, long-term solution to these tactics? I have a few thoughts on the matter. First, there’s nothing like monopoly rents to draw competition to a market, so allowing healthcare entrepreneurs to enter those monopolized markets/service lines would be a great start. And if Sutter Health’s competitor hospitals start doing some thorough cost accounting, they could know how much their different services cost and be able to start setting competitive “out-of-network prices.” When those competitors start winning market share, Sutter Health will have to respond with lower prices and more price transparency to become competitive again themselves.
So many market failures are solved by price transparency.
This is one of those topics that comes up in healthcare reform discussions regularly, but we don’t often take the time to explain it. It’s not currently a trending topic, but it’s a perennial one, so it will come up again sooner or later.
Let’s start with an assumption: All people want health insurance.
But people’s willingness to pay for health insurance varies greatly. If it’s free, few would refuse. If it costs $200 per month, many more would refuse. If it costs $2,000 per month, most would refuse.
What determines whether someone thinks the premium is worth it?
A few things. The two biggest factors are (1) how much healthcare that person expects to need that year and (2) how much money they have. If a person expects to be hospitalized multiple times that year, a $2,000/month premium is probably going to be a lot less (even with the deductible and copays) than going without insurance. If a person is fairly wealthy and has the foresight to recognize that unpredictable healthcare expenses could be financially catastrophic, they would probably also be willing to pay the $2,000 deductible. But healthy people and poor people (and especially poor healthy people) are much less willing to spend much on premiums.
Ok, that was most of the background information, and here’s one more thing. If an insurance company is allowed to charge whatever they want for a premium, you know what they would do? They would collect a bunch of data on every insurance applicant and use some smart actuaries to calculate each applicant’s average expected annual healthcare spending, and then they would use that number (plus a percentage) for the person’s premium that year.
As you would expect, this would work fine for the young and healthy who will have low premiums. But for most others, it can be pretty expensive to the point that many would rather choose to forego insurance.
Now we can talk about how to cause a death spiral.
To solve that problem of premiums being too expensive for the people who probably need insurance the most and ending up uninsured, the government can make a simple policy that requires insurance companies to charge everyone the same premium. (For simplicity, I’m saying they will only have a single premium, although in reality they usually say something like, “You can only charge the sickest person 3x what you charge the healthiest person, and you can only use these few variables to decide who is sick and who is healthy.”)
What happens? The sick people get a great deal, and the healthy people end up subsidizing the sick people’s premiums.
This enables the sick people to get insurance, although now that the healthy people’s premiums are so expensive relative to what they’re getting out of it (many of them probably don’t even end up using their insurance most years), they say, “Forget that. Buying insurance isn’t worth it anymore.” And they drop out of the insurance pool in favor of going uninsured.
What happens then? All the healthiest people are no longer in the insurance pool, so the average expected healthcare spending per person will be much higher the next year. Therefore, the insurer is forced to raise premiums accordingly.
And, predictably, when those new higher premiums come out, again the healthiest in the insurance pool will say, “Last year it was just barely worth it for me, but this year with this crazy increased premium, it’s not worth it.” And they drop out of the insurance pool. This is about the time when the insurance companies get labeled as greedy, too.
The next year, premiums rise again, and more people forego insurance.
Do you see the pattern? That’s a death spiral. And, again, it’s caused by requiring insurance companies to restrict the degree to which they can charge different people different premiums.
There is a way to prevent this, though. If, at the same time as restricting premiums, the government also creates some sort of incentive for healthy people to stay in the insurance pool, it can prevent them from leaving.
That’s what the individual mandate was for. It was the government saying, “Hey, we need you healthy people to be in the insurance pool subsidizing the sicker people’s premiums, so we’re going to persuade you to do that by making you pay a fee (tax) if you don’t buy health insurance.”
It didn’t work very well. Many people didn’t know about it, and those who did figured they’d rather pay a relatively small tax than a relatively large insurance premium. That’s why premiums in the private market rose so quickly after the Affordable Care Act was passed. Not enough healthy people joined the insurance pool, and more dropped out each year. It wasn’t exactly a precipitous death spiral, but that is the direction it was trending.
This week’s post is a little later than usual, but next week will be back on track with a Tuesday post about Hayek’s book about socialism, The Road to Serfdom, and how it fits into my framework for categorizing governments.
Something I have noticed for many years now is that many good and important healthcare reforms are touted by experts for the wrong reasons. Supporting a good reform for the wrong reason may seem harmless, but without a clear understanding of the principles behind why the reform is important, the implementation may undermine much of the benefit of the reform, or it may not be evaluated based on the right expected impact (and, therefore, cause the reform to be incorrectly judged as a failure). Either one of these mistakes could ruin the reform.
Example 1 – Quality metrics reporting: This refers to making providers track and report a variety of quality metrics, which are then usually used to give quality-contingent bonuses. These quality metrics are also often reported publicly with hopes that it will add some accountability to providers and motivate the lower-quality ones to improve.
Example 2 – High deductibles: Some experts say that if people have high deductibles, they’ve got some “skin in the game” and will therefore stop being such spendthrifts, which will decrease overutilization and total healthcare spending.
It’s true that a high deductible will reduce healthcare spending;, although, unfortunately, people tend to decrease unnecessary AND necessary care. That’s what the classic Rand Health Insurance Experiment demonstrated. But lowering spending is not the main purpose of high deductibles. The primary benefit of them is that they make people actually consider price when they are choosing where they will get care, which allows people to start preferentially choosing higher-value providers (i.e., make value-sensitive decisions). Of course, this only applies to services that cost less than the deductible.
Example 3 – Bundled payments: These are seen as a way to get providers to integrate more and, through that integration, “trim the fat” (what’s with all the flesh metaphors?). Usually the reduction in total episode costs comes from providers becoming less likely to discharge people to skilled nursing facilities.
Bundled payments do get providers to send fewer patients to nursing facilities and to find other superficial ways to decrease total episode costs, but the primary benefit is that they allow people to compare, apples to apples, the total cost of a care episode. Again, it’s all about removing barriers to value-sensitive decisions. This will lead to complete care process transformations as providers become motivated to improve value relative to competitors and are assured they will win greater profit as a result. So implementing bundled payments with a single provider in a region will likely result in only very modest benefits, which will come from those superficial low-hanging-fruit types of changes.
That’s enough examples for this week! Merry Christmas, and may everyone do good things for the right reasons.
In Parts 1 through 6, I explained the Healthcare Incentives Framework, which is useful for clarifying the necessary ingredients of an optimal healthcare system. Those are the pre-requisite readings to understanding this post, and I will not fully summarize or provide the rationale for them here. But, just as a reminder, Parts 1 through 6 culminated in the goal of getting market share to flow to higher-value providers and insurers, which would be enabled through three critical inputs to decision makers/patients: (1) multiple options, (2) the ability to identify the highest-value option, and (3) incentives to choose the highest-value option. As barriers to those three inputs are minimized, any healthcare system will begin to evolve to deliver higher and higher value. This is the only way to unlock sustained value improvement in healthcare systems.
An important point about this framework is that it is, in a sense, welfare-spectrum neutral, meaning the principles apply to healthcare systems that sit at any point on the welfare spectrum, from libertarian-type systems to fully government-run systems.
Now let’s imagine up some concrete examples of what different types of systems might look like if we built them from scratch using the ingredients from the Healthcare Incentives Framework.
A Libertarian-type System
In this system, there are many private insurers all offering creative and innovative health insurance plans. Their efforts are focused on trying to maximize cost-saving prevention so they can lower their costs and then outprice their competitors. This has led to many ways of keeping people out of hospitals and emergency departments. But since health insurance is an inherently complex product, there are some standardized levels of coverage that have been agreed upon to help people compare those plans apples to apples. This standardization has been implemented in a way that maximally improves comparability with minimal limitation on plan design flexibility. Multiple health insurance comparison shopping websites have arisen, all highlighting those standardized coverage levels, differences between plans, and clear pricing.
An important aspect of these insurance plans is that most of them require the enrollee to pay some part of the price differential between providers; this did not need to be mandated because insurers found that they are able to price premiums more aggressively when they have implemented those cost-sharing characteristics. The plans that do not have this feature are much more expensive, but some people prefer them because they don’t ever need to worry about prices when choosing providers.
There is no requirement for people to buy health insurance, but because there is also no guarantee of care if someone without insurance has a catastrophic medical expense, many people are motivated to buy catastrophic coverage. The rest of their care they buy a la carte out of pocket.
Many of the poor, as well as people with chronic expensive medical conditions, are priced out of the insurance market, but private charities have cropped up that assist with this for most of them.
Looking at the provider side, nonprofits have played a leading role in establishing standards in provider quality metric tracking and reporting. These nonprofits also certify the quality information being reported by providers, so patients are able to compare the quality of different providers apples to apples. The quality metrics being reported and certified are determined by what patients find most relevant in helping them decide between providers for each service they are shopping for. Similar to the health insurance shopping websites, there are provider shopping websites presenting those standardized metrics alongside providers’ advertised prices.
Because providers are assured increased market share when their value goes up relative to competitors, there is a great variety of innovation toward crafting high-value care experiences for patients. Most of the value improvements are in the form of cost-lowering innovations because of the downward pressure on price exerted by the uninsured population and the price-sensitive insured population. Providers have particularly found that shifting the location of care to less expensive settings (including even the patient’s own home) and shifting to relying more on narrowly trained provider types (particularly for treatments that are relatively algorithmic) is very effective at lowering costs. Suppliers of healthcare devices have also found that they are more successful as they focus on developing lower-cost devices, even if that means sacrificing some amount of quality or features. And since government regulations have been kept to a minimum, all these innovations have been allowed to progress and flourish quickly. This occasionally results in unsafe practices and devices cropping up, and individuals have been hurt in the process, but people have felt that the rapidity of innovation that has improved so many lives has been worth that cost. And any practice that proves to be unsafe is exposed quickly in this marketplace.
Providers have also found that, when patients are shopping for a provider, they are looking for a specific well-defined service or bundle of services, such as a year’s worth of chronic disease management, a CT scan, a hip replacement (including all the pre-op workup and the post-op rehab), or a diagnostic evaluation. This has led to standardized bundles of services (also certified by those non-profits), which has made shopping for healthcare services easier and also enhanced the ability to compare the prices from one provider to another.
This system is not perfect. Some people choose not to buy insurance and then have to declare bankruptcy when they have an expensive care episode (or end up not getting care due to inability to pay), and some people want to buy insurance but are frustrated that they cannot afford it, although this number is decreasing each year. Providers face challenges dealing with multiple insurance plans with different reimbursement schemes and coverage rules. And unsafe practices or innovations crop up every so often that harm patients. But, overall, the value delivered by insurers and providers increases rapidly as insurers find new ways to prevent care episodes, and, for the care episodes that cannot be prevented, providers find ways to make care safer, more convenient, and more affordable.
A Single-payer System
With the government running the single insurance company for this system, they have been able to easily implement many of the needed aspects of an optimal healthcare system. They automatically cover all known cost-saving and cost-effective preventive services without copays, which includes population-based preventive services but also focuses more and more on targeting extra services to high-utilizing patients to prevent hospitalizations and ED visits. Their cradle-to-grave time horizon has helped this immensely.
The prices the insurer assigns to services are not firm but are rather considered to be the “maximum allowable reimbursement,” so any provider that wants to charge a lower price will have the freedom to do that. And providers who innovate and find ways to charge less win market share because the insurance plan’s cost-sharing policies require people to pay less out of pocket when selecting a less expensive provider. The insurer has also found that paying a single fee for standardized bundles of services has motivated a great deal of provider innovation and cooperation.
Together, all these reimbursement policies help to prevent as many care episodes as possible and minimize the cost of the episodes that are not preventable.
The insurer’s fee schedule also includes a multiplier to adjust for regional cost variations, and they leverage this to increase reimbursement in underserved areas as well, which has especially helped rural areas maintain enough providers.
As a condition of being accepted as in-network by the insurance plan, providers are required to use an electronic medical record that is able to decode and record to the patient’s secure cloud-based personal health record. Providers are also required to report specific quality metrics. These quality metrics are never used for giving bonuses, but they instead focus on the aspects of quality that patients find most relevant when they’re trying to decide between provider options. The insurer operates a single website that lists all in-network providers along with these risk-adjusted quality metrics and each provider’s prices (displayed as the amount the patient will be expected to pay out of pocket).
Providers appreciate this system for many reasons. They only deal with a single insurer, which minimizes insurance-related overhead expenses and gives them a single set of incentives to respond to. They are completely free to build hospitals and clinics wherever they think they will be most profitable. And they can organize care however they want provided they adhere to the safety and reporting regulations.
Now, having seen the main aspects of this system, let us consider the impact of not adhering to the Healthcare Incentives Framework’s requirement of having multiple insurer options. Recall that the jobs insurers are primarily responsible for are risk pooling and cost-saving prevention. And the reason having multiple options is desirable is because—assuming patients can identify and then choose the highest-value insurance plans—insurers will have a profit motive driving them to innovate to find ways to increase the value they deliver, which especially means finding ways to do more cost-saving prevention that will result in more care episodes being prevented, thus lowering the total cost of care and insurance prices. With a single government-run insurer, that innovation and its attendant benefits will be curtailed. Clearly there are many compensatory benefits, including simplicity, reduced administrative overhead, uniform incentives, and a straightforward way of achieving a society’s goal of universal access to insurance. Depending on the priorities of the country, these benefits may outweigh the costs. It is a question of values. But the decision becomes clearer when the costs and benefits of each option are understood.
A Government-run System
This system, like the single-payer system described above, has a single insurer that is run by the government. But here the government also owns all the healthcare facilities and employs all the healthcare providers.
On the insurance side, reimbursement policies are familiar, with “maximum allowable reimbursements,” bundled pricing, differential cost-sharing for patients, and a website reporting the quality metrics and prices (out-of-pocket costs) of providers. The insurer also has a robust department working on preventing care episodes by finding innovative ways to keep people healthy.
But what about the provider side? Initially it may seem that patients only have a single healthcare provider option, but just because a single entity owns all the hospitals and clinics does not mean they are all the same. In this system, the government determines where healthcare facilities will be built and what services they will provide, but it allows great freedom in their operation. At every facility, providers are able to organize care however they like, and they are also free to charge any price as long as it is at or below the maximum allowable reimbursement for each service. They have great motivation to put in the effort required to find ways to lower costs (thereby enabling them to charge lower prices) and improve quality because they receive bonuses that are calculated based on the amount of money they saved the system (the number of patients treated multiplied by how much less than the maximum allowable reimbursement each of those patients was charged).
Because the insurer and providers are all operating under one roof, the billing in this system is particularly simple. Some specific requirements are in place for the purpose of accumulating data that will help track for problems in the healthcare system, but there are no complex billing codes or arcane documentation requirements. When providers document a patient encounter, they do so for the purpose of communicating to other providers what they thought and did.
Government healthcare expenditures in this system are sustainable mostly because providers are actively innovating to improve value—much of which results in them being able to lower prices so they can earn bonuses.
Overall, this system has been organized in a way that, despite the government ownership of providers, maintains the ability to reward value with market share, which drives value improvement. The insurance side also innovates to prevent care episodes by leveraging its cradle-to-grave time horizons and connections with other non-healthcare public health sectors.
There are barriers to provider innovation compared to other systems. Providers face the upside of potential bonuses for doing well, but there is not necessarily much downside risk in providers who are mediocre or worse and still getting paid their stable salary. In any other market, the risk of being forced out of business due to lost market share drives competitors to innovate to improve their value so they can become profitable, but in this system the worst-case scenario is that the government closes their clinic and relocates those providers elsewhere. Additionally, many innovations require new types of facilities or caregivers, or they require cooperation between multiple types of providers, which can be difficult when providers have limited control over facility design, placement, and reimbursement contracts.
The effects of these innovation barriers are difficult to quantify, but they need to be balanced with the benefits of a reduced documentation burden, a simpler billing system, and a more reliable dispersion of healthcare services across the country.
Policy makers overseeing any type of system need to understand their system’s current barriers to the three critical inputs: multiple options, ability to identify the highest-value option, and incentive to choose the highest-value option. (Many of the most common barriers to those three inputs are outlined in Part 6.) They need to understand that those barriers are the primary inhibitors of their healthcare system evolving to deliver increasingly higher value for patients over time. And as they enact policies that eliminate those barriers, they will see a predictable chain reaction of more patients choosing higher-value insurance plans and providers, those higher-value competitors earning more profit, and parties in the healthcare system beginning to innovate to deliver higher value, all of which will result in the healthcare system transformation that is sorely needed the world over. Policy makers who understand this Healthcare Incentives Framework are also empowered to propose and support policies that expand access in ways that do not create new barriers to those three critical inputs.
As healthcare reforms begin to take this focused direction, the innovations and value improvements will be exciting to watch!
In Part 8, I will conclude this series by imagining how the U.S. healthcare system might look with the Healthcare Incentives Framework fully implemented.
In Part 5, we talked about the three requirements for getting market share to flow to the highest-value options, which is necessary if we want higher-value parties (insurers and providers) to be rewarded with profit. The context for why this is the crucial feature of our optimal from-scratch healthcare system is discussed in parts 1, 2, 3, and 4.
As a reminder, those three requirements were for patients to have (1) multiple options, (2) the ability to identify the highest-value option, and (3) incentives to choose the highest-value option. Let’s look at examples of the common barriers to each of them so we will know what to avoid when we build our optimal healthcare system.
Our goal: Avoid any policies that directly or indirectly limit the number of competitors in a market.
For providers, this means allowing them to build hospitals and clinics whenever and wherever they want. They will not do this with reckless abandon because they will know that, if they choose to build in a new region and end up delivering lower value than the incumbents, they will not get many patients and their new endeavor will not be profitable.
For insurers, this means avoiding regulations that make it difficult for them to enter new markets. Nationally standardized regulations will simplify the process of selling insurance in multiple markets, but this does nothing to ease insurers’ greatest challenge of entering new markets, which is the challenge of negotiating prices with providers in that region. But having many provider options in a region should help with this.
And as for things that affect both providers and insurers, we will need good antitrust laws to prevent too much consolidation. And we will need to avoid policies that limit the freedom of them to vary their price and quality so that they can offer unique value propositions (otherwise we end up with many options that all are effectively the same, which defeats the purpose).
Identifying the Highest-value Option
The barriers to this are different for providers and insurers.
On the insurer side, the most difficult aspect of identifying the highest-value option is being able to predict which mixture of premium, copay, deductible, coinsurance, etc. will cover what you need in the cheapest way possible, as well as identifying/predicting which services will be needed and whether they are covered in the benefits. Having some standardization can make this much simpler (but still challenging), such as what healthcare.gov does with multiple standardized quality tiers of insurance plans and grouping all those options together to be compared apples to apples.
On the provider side, one of the first challenges is getting people to recognize that they have multiple options that are of very different value. In almost every other industry, people are great value shoppers, but they have been conditioned historically not to even think about it when choosing healthcare providers, which is probably a consequence of the chronic unawareness of the huge variations in the quality of providers as well as the third-party payer system that so often causes people to pay the same no matter which provider they choose. This is one reason why healthcare provider quality reporting websites are so infrequently used even when they are available.
The other issues with identifying the highest-value providers can be divided into barriers to knowing price beforehand and barriers to knowing quality.
Barriers to knowing price beforehand: The biggest one is uncertainty about what services will be needed—for example, most people do not present to the emergency department with a diagnosis already, nor can they predict what additional complications might arise during a hospitalization. But for specific, well-defined episodes of care, such as an elective surgery, there are great ways to make prices knowable beforehand (look up bundled pricing for an example).
Barriers to knowing quality: People do not know where to find quality information even if they do go looking for it. And if they find it, most of what they find are quality metrics geared specifically toward comparing providers for the purpose of allocating bonuses rather than quality metrics that actually provide metrics that are relevant to helping a patient choose between providers. For example, a hospital’s overall mortality rate or readmission rate has little bearing on the quality of care a patient will receive for something like a straightforward elective gallbladder removal. Standardized, easy-to-understand, appropriately risk-adjusted, patient decision-oriented quality data are needed.
And the last thing to mention in this section are the barriers to identifying the highest-value option that will not likely be overcome. For example, medical emergencies don’t allow time to make a thoughtful decision about which hospital to go to. And low health literacy is a barrier for many people. And there are many important aspects of care that cannot easily be measured, such as a primary care doctor’s ability to diagnose the cause of ambiguous symptoms. Does the presence of these more insurmountable barriers mean that no health system will ever be able to get market share to flow to the higher-value options? No—even if many decisions about which provider to go to are not particularly logical or value-focused, as more people start choosing providers based on price and quality information, higher-value providers will begin to win more market share and the desired incentive scheme that motivates value-maximizing behaviors will arise.
Incentives to Choose the Highest-value Option
Even when people (1) have multiple insurer and provider options and (2) are able to identify the highest-value options, there are still barriers to them choosing the highest-value options.
The first barrier is when anyone but the patient is acting as the decision maker. These alternative decision makers typically have a financial stake in the decision and want to choose the cheapest option without regard for quality. For example, insurers that offer very narrow networks act almost like a first-cut decision maker to narrow patients’ possible provider choices down to only providers that are willing to accept the lowest prices. Patients/patient advocates should be the decision makers because only they will adequately weigh the quality aspects that are most important to and impactful on them.
But even when the patient is the decision maker, they will ignore prices if they are required to pay the same amount regardless of the provider or insurer they choose. This is usually not an issue with insurance plan selection, but it is a major issue with provider selection. For example, flat copays require the same payment from the patient regardless of the full price of the providers. High-deductible plans solve this problem for any service below the deductible, but, once that deductible is surpassed, they have the same problem. Ideas such as reference pricing, multi-tier provider networks, or even paying patients for choosing lower-cost providers can help with this.
If the above discussed barriers to the three requirements for getting market share to flow to the highest-value options are minimized, the healthcare system will naturally and continuously evolve toward higher value because it will motivate providers and insurers to perform their jobs in value-maximizing ways. Government interventions may still be considered for areas where natural incentives will not motivate those parties to do all the jobs we want them to do (particularly in the area of equitable access), but the “healthcare market” will start functioning to benefit patients and what they value.
This concludes the big-picture explanation of this Healthcare Incentives Framework. In other words, we have now discussed all the ingredients that need to go into an optimal from-scratch healthcare system. In Part 7, we will solidify the implications of this framework by imagining up a few examples of different types of healthcare systems with the Healthcare Incentives Framework implemented to show how all those ingredients can come together.
In parts 1, 2, and 3, we looked at what we want a healthcare system to do for us (the “jobs”), we figured out which parties in a healthcare system have an incentive to perform those jobs, and then we discussed that, for those parties to have an incentive to maximize value while performing those jobs, they need to make more profit when they deliver higher value.
The next part of the Healthcare Incentives Framework takes a look at the different levers that affect profit to see which can be used to reward higher-value parties with more profit.
Let’s review how profit is calculated:
Profit = Revenues – Costs
Profit = (Price x Quantity Sold) – Costs
And since most companies sell more than one product or service, . . .
Profit = ∑((Price x Quantity Sold) – Total Costs)
These are the only four factors that determine a company’s profit: service mix, price, quantity sold, and total costs. So, which can be used to reward higher-value parties with more profit?
Service mix: Companies in healthcare already generally have the freedom to dedicate their resources in ways that maximize the amount of higher-profit services they deliver (why do you think my hospital renovated the orthopedics floor first?), so I won’t go into depth on this one other than to say that we need to allow them to continue doing that.
Price: Could we use prices somehow to reward higher-value parties with more profit? How about we try giving bonuses to higher-value providers? Those bonuses would essentially raise their prices, which actually lowers their value (remember, Value = Quality/Price). Sure, other providers would be motivated to raise their quality to get the higher prices too, but all we’d end up with is a little better quality at a little higher price, with no clear path to much else. Therefore, this approach doesn’t do a very good job of accomplishing the core goal of rewarding higher value with more profit. It’s not the lever we are looking for. But, while we’re talking about prices, there’s one crucial aspect of price that we need to include in our optimal healthcare system: providers and insurers need the freedom to set their prices themselves. The reasons for this will become clearer in subsequent posts.
Costs: Finding a way to lower the costs of higher-value providers is basically the same as raising their price–either way, more money is given to them, which raises their profit but lowers the value people obtain from them. So, the same problems exist with using costs as a lever to reward value with profit.
Quantity Sold: We’re left with one last lever, and I saved it for last on purpose. What would happen if higher-value insurers or providers all of a sudden were getting more patients flocking to them? They would certainly get more profit (assuming they have the capacity to take on more patients/subscribers). And the patients are happy because more of them are getting higher-value services. Now think beyond that static world. Over time, higher-value parties would continue to make more money and expand, and lower-value parties would be forced to improve their value or just go out of business. Parties would have an incentive to take big risks on innovations that improve value because they would know that, if the innovation ends up improving value for people (lower price, higher quality, or both), it will be rewarded handsomely with profits.
In summary, the best way to reward higher value with more profit is to get more patients to flow to them. This is how to permanently “bend the cost curve” and weed out low-quality options.
In Part 5, I will enumerate the core elements required for people to do that.
In Part 1, I enumerated the jobs we want a healthcare system to do for us. In Part 2, I explained which parties in the healthcare system (providers or insurers) have incentives to perform each job. The next part of the Healthcare Incentives Framework is the biggest challenge: how do we shape those incentives so that they don’t just reward parties for merely performing those jobs, but so they also encourage them to perform their jobs in the best way possible? (“Best way possible” will be more precisely defined below.)
To understand this discussion, two key definitions must be absolutely clear.
High value can be found at any price point. For example, it could be reasonable quality for a super low price, or it could be the absolute best quality for a not-crazy-high price. It just depends on how much money is available to be spent.
And just as a brief sidenote, I’ll mention that “quality” has many facets, and it’s the patient who–as the person consuming the service–ultimately gets to decide what constitutes quality. And “price” denotes the actual total amount of money paid for the service.
Second, the definition of a financial incentive. A financial incentive is something that rewards behavior with increased profit. Profit is the key here. Companies (or, the people who run them) don’t take huge risks and expend great effort that won’t result in more money for them. (This also applies to non-profit organizations, only they call it “surplus.”) So a project that is projected to increase revenues but also increase costs just as much is a waste of effort from a company’s standpoint.
With those two definitions in mind, here is the principle: Our goal is to create financial incentives that reward value for patients. In other words, a provider or insurer needs to make more profit when they provide higher value for patients. This would motivate them to out-compete and out-innovate their competitors. And the form of that competition wouldn’t be destructive corner-cutting and responsibility-avoiding–it would be to actually provide higher value for patients.
Instead of hospitals spending fortunes on beautiful lobbies, they would be competing on how to make care cheaper, faster, and more convenient. Because that’s how they would make more profit.
Instead of insurers climbing over each other to find ways to cream skim the healthiest patients and creatively design networks to get sick patients to avoid them, they would be competing on how to most efficiently provide cost-saving prevention and how to have the best customer experience. Because that’s how they would make more profit.
Some say financial incentives have no place in healthcare. What they don’t understand is that there will always be financial incentives in any industry where people get paid for their work. We can’t ignore the inescapable presence of financial incentives in healthcare. But we can shape them in a way that motivates providers and insurers to maximize the value delivered to patients.
In Part 4, I’ll enumerate the four levers that affect profit, which will then lead to an explanation of the barriers healthcare systems commonly have to those levers being used to reward value with profit.
At the recent AcademyHealth Annual Research Meeting in Baltimore, I went to a session on the accomplishments and challenges of community collaboratives. A community collaborative is a pretty cool idea that goes something like this: for a specific community (i.e., city), let’s get all the leaders of the providers and payers in a room (plus a bunch of other stakeholders committed to improving health) and make some decisions collaboratively on how we can fix healthcare in the community. The Robert Wood Johnson Foundation has provided the money to make these things happen in 20 different communities in the U.S. (see Aligning Forces for Quality, and Value-Based Payment Reform).
Sounds like a great idea, right? Well, an interesting challenge has arisen. More and more, these collaboratives are expected to find ways to reduce the total healthcare spending in that community. But so far, they’ve pretty much failed miserably. Why? Well, think about it. Here are all the leaders of payers and providers in that community sitting in a room together saying, “We need to reduce total spending,” but the savings are going to have to come from someone in that room, and none of them are going to say, “Sure, my organization will take one for the team! I’ll have to cut everyone’s pay, but because it’s for a good cause, they’ll love it.”
Does this mean these kinds of collaboratives are utterly useless in terms of lowering total spending in communities? That was the question I (carefully) asked at the end of the session, and one of the panelists gave a really insightful answer. To paraphrase/translate/elaborate on what he said, his answer went something like this:
Yeah, we’re not going to convince anyone in that room to just give up money like that. But what we can do is come up with standardized ways of reporting prices and quality. And when those are standardized across all payers and providers, patients will be better equipped to choose higher-value payers/providers, which, in the U.S., usually means ‘cheaper’ payers/providers. So this standardization will allow total spending to go down by getting more people receiving services from cheaper competitors. Thus, the higher-priced competitors will be the ones who are losing money when total spending goes down, all because we helped standardize quality and price reporting.
I agree. There are still many barriers to getting patients to choose these “higher-value” providers/payers, but this would help solve one of the biggest ones. And with each barrier we overcome, more patients will be enabled to receive higher-value care, which is what everyone wants, right?
I went to the AcademyHealth Annual Research Meeting over the weekend (it’s probably the biggest health policy conference of the year), and then this morning I went to the annual report for one of the regions participating in RWJF’s Aligning Forces for Quality, and I can’t stand the abuse of the word “value” any longer. The picture on the right is part of the cover of the program I came home with from the meeting this morning. Does the text strike anyone else as . . . ineffective? Shortening the path is great, but shortening it to “high-quality, high-value health care”?
Let’s do a refresher on what the word “value” means. This has a precise definition in the professional and academic world, and I guess anyone can choose to define a word however they want, but this is the widely accepted (and most useful) definition:
Value = Quality / Price
Quality can be defined differently as well, but it generally includes outcomes, patient experience, and everything a patient wants. It doesn’t just include quantitative metrics, but it also includes all the softer metrics that are important to patients. For example, the softer metrics related to a physician would include bedside manner, friendly office staff, convenience, length of relationship, and so forth.
Price is the amount of money paid to get the quality. PRICE IS NOT THE SAME AS COST, NOR IS IT THE SAME AS TOTAL SPENDING. I’ve never done all caps for a sentence before, but this is the first time I felt like a sentence needed it. Cost would be the actual costs that were incurred to provide the service, but patients don’t care about cost. They care about the price, the thing they actually have to pay. And, in healthcare, beware of the word “charge” as well, which generally refers to the price a provider is asking for even if the insurer pays him something completely different. Confused? I explain provider pricing in an earlier post.
Now that the more appropriate meaning of the word “value” is understood, look back at the text on the cover picture. “Shortening the Path to High-quality, Low-cost Health Care” would work. “Shortening the Path to High-value Health Care” would also work, but I guess it would not be as explicit as it would be to anyone who hasn’t read this blog post. But not Hooper Humperdink. Not him.
So, next time you hear someone say, “We need to improve the value of healthcare delivered in the U.S.,” you should think, “Ah. This person wants to improve the quality and/or decrease the prices of healthcare in the U.S.” And FYI, the only way we can substantially decrease prices is to decrease COSTS first. Yes, I would say that our new absolutely most important goal in the health policy world (now that the ACA stands; for the time being at least) is to help providers decrease costs and then make sure prices follow.